More likely than not, your answer here will depend on where you live.
But if you’re not aware of what a “regional mortgage cap” is, or was, consider that until 2003, the Canada Mortgage Housing Corporation (CMHC) had different maximum dollar amounts on loans they would insure, for different areas, having recognized that prices (gulp!) are different in different areas!
With the growing disparity in average price between cities across Canada, the idea of one mortgage cap for the whole country is getting more and more ridiculous.
Is it time for CMHC to bring back the regional mortgage cap?
Let me give you a scenario…
You’re trapped somewhere – whether it’s like the 33 Chilean miners (BTW – the movie “33” with Antonio Banderas isn’t half bad), or like the survivors of a plane crash in the mountains, or like any other situation from a movie or in real life, where people are stuck in a fixed location with a diminishing amount of food.
You’re in a group with men, women, and children, each of whom is of a different age, height, and weight, not to mention of different health.
You have a limited amount of food at your disposal.
So how do you divide that food up?
What is “equal” among the group?
Let’s say there are 20 of you, and you have 100 crackers. Does each member of the group get five crackers?
What if one member of the group is 300 pounds, and one member of the group is 100 pounds? Doesn’t the 300-pound person need more food to sustain life than the 100-pound person?
Should the food be apportioned equally, based on number? Or equally, after taking into consideration the differences between each person, who are not, by all accounts, equal?
“One size fits all” is certainly the easiest method, and it’s probably the most “fair” from a subjective viewpoint. But if you truly considered all the variables, and the goal was relative fairness, then you’d most certainly account for the differences.
So where am I going with this?
Canada is a country, and within that country there are provinces, and within those provinces there are cities, towns, areas, and neighbourhoods. You have rural “middle of nowheres,” and you have the centre of “the action” in major metropolitan areas.
And yet, the Canadian Mortgage Housing Corporation has ONE single cap on the loan amount that they will insure, across the entire country.
Does this make sense to you?
Consider how different various areas of our massive country can be as you move east-west, north-south, and in and out of various provinces and cities.
And thus consider how different prices are across the country, and how relative purchasing power differs for Joe in Saskatoon, and Bob in Vancouver.
Let me take a quick step back here for a moment and remind everybody what CMHC is.
We all think of the CMHC as the crown corporation that insures our mortgages.
But the CMHC, at their core, is here to assist first-time buyers with the purchase of their homes. Or at least, that was the purpose of their formation after World War II, and was their mandate for decades on a go-forward basis.
Today, it seems the CMHC is simply here to provide insurance on mortgages, with the risk being shared equally among 33,000,000 tax-paying residents of the country.
We all know that the CMHC will only insure mortgages for properties purchased for under $1,000,000, and that this was instituted back in 2012.
So before that, it was just “let the good times roll,” right?
In fact, there was a “regional mortgage cap” up until 2003, when it was wiped out, and ONE mortgage cap was provided in its place.
I can’t speak to why the regional mortgage cap was wiped out, but I can say that a lot of people have suggested the CMHC bring it back.
I had coffee with Ben Rabidoux this week, and we chatted with a few real estate bears who continued to marvel at how our market keeps moving, and moving, and moving, defying all logic.
The bears wanted to know, “What could be done to cool the market?” We explained that steps have been taken; many steps, in fact, whether it’s the 5% minimum down payment, the 20% down payment for properties over $1 Million, the 20% down payment required on second properties, or the abolishment of the 40-year amortization.
And then Ben had an idea, which admittedly, he’s been preaching about for years: bring back the regional mortgage cap.
Here’s an excerpt from an article Ben wrote back in January of 2014, which you can read in full HERE.
Prior to 2003, CMHC had a regional mortgage cap that set a maximum dollar amount on the size of mortgage they would insure. This made a lot of sense given that CMHC’s original mandate was geared toward helping first-time buyers get into entry-level housing. The logic here is simple: If a buyer can afford a home that is priced significantly above the local average, they shouldn’t need what effectively amounts to a taxpayer-backed subsidy to do so.
In what can only be described as a massive policy blunder, this cap was eliminated in 2003. For nearly a decade, CMHC would insure mortgages of any size, from simple starter homes to opulent mansions, a truly epic case of “mandate creep.” In 2012, a nationwide limit was re-established; CMHC will no longer insure mortgages on homes that are purchased for more than $1,000,000.
This is a step in the right direction, but it ignores the fact that a million-dollar home is well above a starter home in nearly all parts of Canada. This should change. One possible solution would be to set the maximum mortgage cap to the average resale price in each census metropolitan area and have that cap change annually to reflect changing house prices.
It’s not my job to set fiscal and monetary policy across the country, nor is it really any of my business whether the real estate market goes up or down.
But reinstating the regional mortgage cap, whether you’re doing so to “cool the market” or not, is a very logical idea.
Just consider the average price of a home in these major Canadian cities:
Saint John – $175,557
Quebec City – $254,831
Halifax-Dartmouth – $264,487
Winnipeg – $271,759
Regina – $316,025
Montreal – $339,436
Saskatoon – $342,553
Ottawa – $358,950
Edmonton – $371,756
Calgary – $444,535
Victoria – $543,459
Toronto – $630,876
Vancouver – $937,334
Look at the spread!
The average house price in Vancouver is three times the average house price in Regina!
And yet residents of both cities have the same maximum dollar amount for CMHC-insured mortgages.
Does that make any sense?
If the apparent mandate of the CMHC is to assist first-time home buyers, and help get people into the market, then should they really be insuring mortgages for $995,000 homes?
Sure, in Vancouver, that’s an “average” house, and the average home-buyer buying an average house might fit the apparent mandate of the CMHC.
But what does $995,000 buy in Edmonton? Or Saint John? Or in the middle of nowhere in Nunavut?
Shouldn’t there be some accounting for the different house prices?
A person buying a $995,000 house in Vancouver might be the very first-time buyer that the CMHC wants to help, but the same can’t be said for the person buying a $995,000 house in Regina.
Is the CMHC now in the process of “helping” folks buy mansions across Canada?
At the end of the day, people have to remember that it is they that are on the hook for all of these mortgages, not some sort of non-entity with an acronym for a name.
So if you say, “I don’t care what CMHC does,” you might as well say, “I don’t care if the Liberal government snuck in more eco-taxes last week,” or “I don’t care if my marginal tax bracket increases.”
And one more thing – as a shout out to Ben Rabidoux, another section of that January, 2014 article read the following:
CMHC currently has a program that allows buyers to purchase a second home with as little as 5 per cent down. This program is most commonly used for purchasing recreational properties such as cottages, but can also be used to purchase a “pied-à-terre” for those who have to often travel to another city for work, or to purchase a home for children while they are attending college or university.
In the context of CMHC’s original mandate, this program is simply indefensible. If someone is fortunate enough to have the income and assets to purchase a second home, for recreational purposes or otherwise, they should not require taxpayers to bear the risk, particularly considering that the majority of Canadians are not fortunate enough to own multiple properties themselves. This program needs to go.
As an aside, contacts in the mortgage industry suggest that some investors are also currently abusing this program. In 2010, the government wisely changed the rules so that investors must put down 20 per cent on investment properties. However, the door has been left open to purchase investment properties with 5 per cent down through the Second Home Program, with taxpayers bearing the risk. Of course, the applicant can’t state up front that the home will be rented out, but they are free to quietly rent out their second home after the deal closes.
That program was, in fact, eliminated last year.
Have a re-read of the article if you get a chance.
Perhaps it’s time to update that article? Or provide a follow-up?
Maybe that should be the topic of Monday’s blog…